The Customer Confidential Podcast
“If a man seeks to be happy, he’s probably not going to end up happy. If a man seeks to live a good life, that person will probably end up happy. Same thing—if a company seeks to maximize shareholder value, chances are they won’t.” — Roger Martin
A decade ago, when Roger Martin was dean of the Rotman School of Management at the University of Toronto, he wrote an article for the Harvard Business Review that called for a shift away from the business world’s almost exclusive focus on maximizing shareholder value. Roger envisioned a new era in which value for customers and the value of customers would take primacy. He called it “The Age of Customer Capitalism.”
To maximize shareholder value, Roger argued, you need to focus first on maximizing customer value. If a business seeks to be a “company that is great for its customers, that cares about its employees, that cares about the communities in which it works, guess what? Chances are it will do much more to increase shareholder value than not.”
Roger’s work had a profound impact on my thinking, and even on my career. He found a way to square the ideas of Milton Friedman with the plain-talking philosophy of Peter Drucker, who contended that the true purpose of a business is to create and keep customers.
Roger was way ahead of his time. In the years since his article’s publication, very few leaders have been able to act on his vision. Now, a decade later, the era of customer capitalism that he predicted is finally dawning—a point that I argue, appropriately enough, in the January/February 2020 issue of the Harvard Business Review.
We are on the verge of a revolution, but to bring the revolution about, we need to require that companies disclose a simple set of metrics that will allow investors to assess their progress toward creating customer value. In future podcasts, we’ll be talking a lot more about the need for transparency, consistency and reliability in public company disclosures about customer data. In the meantime, I thought it would be fun to revisit a conversation that Roger and I had a few years ago.
In the following excerpt, Roger explains why he believes most efforts to increase shareholder value—or tie employee behavior to stock prices—are doomed from the start.
Rob Markey: Something that you had written not all that long ago, but that really resonated with me, was an article about the false premise of the debate on the topic of shareholder value—how people who are arguing against shareholder value as the primary way of thinking about success in business might not be making the right argument, and people who are arguing for it may not be making quite the right argument. Can you explain where you were coming from on that?
Roger Martin: Yeah, sure. I have this view that as long as the people who are against shareholder value maximization keep telling companies, “You need to make this trade-off, stop having as much of your effort on increasing shareholder value, be a good company, care about the environment, care about your workers, be good, etc.,” it's a loser. It's going to lose. First, because companies don’t know how to make that kind of trade-off. And, second, because that’s not the problem, in my humble opinion.
So I go back to one of my favorite people—Aristotle—on this. He said that if a man seeks to be happy, he's probably not going to end up happy. If a man seeks to live a good life, that person will probably end up happy. Same thing [applies here]. If a company seeks to maximize shareholder value, chances are they won't. Right? If a company instead seeks to be a great company that is great for its customers, that cares about its employees, that cares about the communities in which it works, guess what? Chances are that it will do much more to increase shareholder value then than not.
So I'm not against shareholder value going up. I just see a different formula. It's almost an inadvertent outcome of doing some other things. But if you focus on trying—just as Aristotle said—if you wake up every morning and say, “Man, I have to be happy,” if you try to figure out how to be happy, you know, you obsess about crazy things and end up despondent.
But if you say, “I want to make the world a better place, I want to be friendly to the people around me, I want to help people who I can help, I want to do interesting stuff,” what's going to happen? By the time you get home at night, you'll be happy.
And that’s the same thing with corporations. They're going after a goal that makes them unhappy. And how many customers do you know, Rob, who are motivated to buy a product from a company that says, “Our No. 1 goal, the thing we care about more than anything else, is maximizing shareholder value”? And you're sitting there as the poor customer saying, “What about me?”
Rob Markey: Or, how do you feel as an employee?
Roger Martin: Yeah! Who wakes up in the morning, Rob, and jumps out of bed and says, “I'm going to work today to work eight hours, long hours, to maximize shareholder value”? No one.
Rob Markey: Well, then, what some people will argue is that the solution is to make the employees owners of the company and “align their interests” with the interests of shareholders.
Roger Martin: Yes, that is yet another complete logical fallacy. If you ask the question, “What does a stock-based compensation do by way of motivating employees?” If you say, “Rob, I'm going to give you some stock, so that you're motivated to do better things,” what are you motivated to do?
The idea is you're motivated to make the company perform better. But actually, that is not what makes a stock price go up. Stock prices rise and fall exclusively for one reason. And that is the expectations for future performance today. When expectations about future performance rise from their current level, that is the only way a stock price can go up. And what I point out to people is that in the history of the S&P, it's traded at about 18 times earnings, which in essence says the price is 1 time for what you're currently doing and 17 times for what it believes you're going to do in the future.
So the incentive for anybody who you give stock to is to increase expectations about future earnings. And among the ways to increase expectations of future earnings, actually making the company better is way down the list. That's really hard and it takes a long time. And it often isn't recognized for a long time. It's much easier to hype your stock, do aggressive accounting, do a bunch of insane mergers or acquisitions to bulk you up.
And furthermore, the absolutely greatest incentive that stock ownership gives you as an employee is for you to engage in the act of increasing expectations over what they actually should be and then selling out before they come crashing back down to their level.
And who do you sell to? An outside shareholder who is not so cognizant. So actually, rather than aligning the interest of shareholders and managers, it puts them 100% against one another. And that's why it doesn't work. That's why it's been such a bust for companies, is that the fundamental logic is just completely and utterly fallacious.
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